In each of our businesses we are affected by government regulation.
Many times the effect is a direct cost that is measurable. Even if the industry in which you do business experiences little direct cost, there is still a burden through transfer of costs from other industries with which you deal.
Take, for instance, the banking industry - of course I am going to address the regulatory burden in this industry, I've spent the last 37 years as a banker! Banks face regulations identified by acronyms such as BSA, REG Z, HMDA, RESPA, GLBA, CRA, to name a few, that our employees deal with daily. Some of these acts - represented by the "A" in each of the acronyms - relate to protecting a consumer. Some relate to monitoring for other government agencies.
Take, for example BSA, the Bank Secrecy Act, that requires paperwork for anti-money laundering, reporting of large currency transactions, reporting of suspicious activities and identifying customers for the USA Patriot Act. None of this effort relates to greater service to the bank customer. All this paperwork is sent to one of a number of other government agencies, such as the IRS or the Financial Crimes Enforcement Network, for monitoring potential illegal financial transactions.
If it appears a customer is in any way attempting to circumvent the applicable report, the bank must file a suspicious activity report. Banks will pay stiff penalties if they fail to file any of the reports required by BSA.
Regulation Z, also known as truth-in-lending, on the other hand, was established to assure borrowers understand the true cost and risk in borrowing. If you have borrowed personally, you will remember a disclosure statement that shows an annual percentage rate that is normally confusing, but required by this regulation.
Reg Z also requires a lender to provide three business days for the borrower to change his mind about taking a loan on his home. I've had one borrower change his mind in the last 20 years ... you would think that by the time a borrower gets to signing all those loan documents, he have had time to determine if he really wants the loan.
The Bank Secrecy Act has been expanded during the past five years, but was originally adopted in 1970. Reg Z was adopted in 1968 and has had little change over the years. These two regulations are but an example of the large number of regulatory requirements placed on your bank. Not only does each bank incur payroll costs for a compliance department to review and assure the bank is following each, but the employees that are there to service your needs must have knowledge of the requirements. In addition to the added costs of doing business, there is opportunity loss to their customers as a result of resources being directed to regulation instead of service and product research.
We all pay for new regulations as they are heaped upon other outdated regulations. Once a regulation is in place, as in the case of Reg Z, it is extremely difficult to get it changed or eliminated. In just the last five years, major legislation adding additional burden includes the Gramm-Leach Bliley Act, Sarbanes-Oxley Act (also known as the Public Company Accounting Reform and Investor Protection Act of 2002 or SOX), the USA Patriot Act (regulated under BSA) and the Fair and Accurate Credit Transactions Act (FACT Act).
An estimate by the American Bankers Association and the Federal Reserve placed the cost of regulation compliance in 2004 at somewhere between $26 billion and $40 billion per year! Consider the costs of training employees and the huge amount of paper flow. As an example, the HMDA, or Home Disclosure Act, requires 25 specific items on the loan application register for every routine mortgage refinancing. Costs are also incurred for outside audits required to assure compliance and for the salaries of extra employees to assure paperwork is completed.
Compliance is a major activity and cost to your bank. Guess who ultimately pays these costs.
In my opinion, the regulatory environment can be turned around if we take a different position with our lawmakers. First of all, I don't believe you can regulate honesty. The Sarbanes-Oxley Act is a great example of how a small percent of total business - think Enron, Tyco and World Com - created huge burdens for remaining businesses.
One reason for the Sarbanes-Oxley Act was to place additional requirements on public accounting firms for their role in the improprieties. The ultimate result was these accounting firms increasing the costs of audit to the businesses they review.
Congress should not regulate 100 percent of the businesses for the sins of the 1 percent. It is similar to adding layers upon layers of controls costing millions for the protection of a few dollars.
Tell your legislators enough is enough. Any new regulation must be supported by a cost/benefit analysis. All regulations currently on the books need to be reviewed each year by the regulatory bodies administering the regulations under this same cost/benefit analysis. Once an analysis proves the lack of value of a regulation, the regulation is automatically stricken. If Congress has to approve such a cancellation, we will never benefit.
The sins of the few, as well as the fear created by September 2001, should not dictate greater regulatory burden and the resulting economic cost. Otherwise, those that created the fear have won.
Ron Kukes is president and chief executive officer of Alaska First Community Bank & Trust. He can be reached via e-mail at ron@fibank.com.
